Maple Leaf Foods – Too Pricey for the Risk vs Reward

Maple Leaf Foods is Canada’s largest food processor and a leading consumer protein company. The company sold its bakery and rendering business and reorganized itself into a focused protein company in 2017.

It operates in Canada, the U.S., and Asia through well-known brands such as Maple Leaf, Maple Leaf Prime, Maple Leaf Natural Selections, Schneiders, Swift, etc.

As a leading producer of meat products, Maple Leaf focuses on a product portfolio that combines “raised without antibiotics” products, fresh poultry network, and plant protein. The company is known for its quality products and is widely trusted by its customers worldwide.

Maple Leaf’s brand portfolio caters to a wide range of consumer demands, ranging from natural and simple foods with nothing artificial to exquisite food with unique flavours. It operates through two segments – meat protein and plant protein. Meat protein is the larger segment accounting for 95% of total revenues.

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Revenue Growth & Market Exposure

With a history going back to 100 years, Maple Leaf has developed a deep understanding of changing consumer tastes and preferences. It caters to the retail, foodservice, industrial and agricultural industries.

The company sells a wide range of prepared meats, ready-to-cook and ready-to-serve meals, value-added fresh pork, poultry products, and plant protein products, premium grain-based protein, and vegan cheese products. Today, consumers want more basic, natural, and less processed food choices. Its meat and plant protein businesses are highly profitable and cash-generating.

Growth in both of Maple Leaf’s business groups contributed to strong sales performance in the quarter. Though the food industry is an essential service, Maple Leaf witnessed changes like the dislocation of channel shift (food at home), fast adoption of e-commerce, and an increased interest in plant protein interest during the pandemic.

It witnessed some weakness in its global networks and physical supply chains. The Foodservice industry represents ~24% of Maple Leaf volume. Growth in plant protein consumption accelerated from low double-digits to greater than 30% during this time.

Maple leaf’s brands, innovation capacity, and its supply chain proficiency are huge competitive advantages. The company is investing aggressively to acquire companies that add to its broad spectrum of products and are accretive to its future earnings. 2019 was marked by erratic commodity markets and a very competitive plant protein marketplace.

Meat protein sales increased by 5% while plant protein revenue clocked an impressive 24% increase in 2019. The company continues to invest aggressively in growth capacity behind its poultry business, and ongoing growth in plant protein.

Dividends

Maple Leaf has maintained its track record of consistent dividend growth. It has a dividend growth rate of 29% CAGR in the last five years. Maple Leaf is a Canadian Dividend Aristocrat.

The company last raised its dividend by more than 10% and has an annual yield of 2.4%. 2019 marked the fifth consecutive year of dividend growth. In each of the years from 2015 to 2019, Maple Leaf entered into NCIBs and purchased shares worth $622 million during that time. It, however, scaled back its share buybacks to $20 million in 2019.

Maple Leaf is a cash-generating business that can comfortably support the investments required. The company has consistently generated a strong base level of operating cash flow, even in periods of higher commodity prices.

Maple Leaf estimates that the plant protein category will grow to at least $25 billion in North America by 2029 and it will command a $3 billion market share. The company has a long-term goal of 30% annual revenue growth and underlying gross margins of 30%, supported by the required SG&A investment and manufacturing infrastructure. It is focusing on growth in categories such as sustainable meat, poultry,  artisanal meats, and value-added meal kits.

Maple Leaf is a consumer defensive company with relatively recession-proof earnings. It is expecting strong demand from the retail channel, lower sales in the foodservice channel and continued traction in plant protein for the second quarter of 2020.

Competition

The consumer foods industry in which Maple Leaf operates is highly competitive. Maple Leaf is seeing intense competition in the plant proteins, as new entrants and more traditional food companies enter this space.

The company exports significant amounts of its products to customers outside of Canada and could face challenges in the current global trade scenario. Maple Leaf competes with the likes of Premium Brands Holding Corp and High Liner Foods Inc. Premium Brands Holding is one of Canada’s largest food companies while High Liner Foods is a leading processor and marketer of frozen seafood across North America.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:ATD.BATD.BAlimentation Couche-Tard Inc.Consumer DefensiveGrocery Stores0.7342.6037.2813.5613.563.140.00820.820.111540.350.164495Consumable - NecessitiesYESYESYESNOCanada1
TSE:LLLoblawConsumer DefensiveGrocery Stores0.5165.1122.9723.3623.362.790.02062.060.480341.340.060346Consumable - NecessitiesNONOYESNOCanada1
TSE:DOLDOLDollarama IncConsumer DefensiveDiscount Stores0.5053.4716.6429.4229.421.820.00330.330.096740.180.101974Consumable - DiscretionaryNONOYESNOCanada1
TSE:WNWNGeorge Weston LimitedConsumer DefensiveGrocery Stores0.5898.2015.0914.2714.276.880.02242.240.319842.200.059947Consumable - NecessitiesNONOYESNOCanada1
TSE:MRUMRUMetroConsumer DefensiveGrocery Stores0.6857.9714.4718.4718.473.140.01551.550.286640.900.157885Consumable - NecessitiesYESYESYESNOCanada1
TSE:EMP.AEMP.AEmpire Co Ltd A NvtgConsumer DefensiveGrocery Stores0.5535.689.5914.7814.782.410.01461.460.215840.520.046947Consumable - NecessitiesNOYESYESNOCanada1
TSE:NWCNWCThe North West Company Inc.Consumer DefensiveGrocery Stores0.5232.891.6013.0813.082.510.04384.380.573741.440.043846Consumable - NecessitiesNONOYESNOCanada1

Bottom Line

Maple Leaf Foods is well-positioned to benefit from a robust pipeline of opportunities in attractive expanding markets. The plant-based alternative market is all set to grow as more and more people are turning towards vegetarian and vegan options.

Maple Leaf’s plant protein business should continue to grow, given its leading market shares and brands already in distribution throughout North America. Its meat protein group should also gain from strong commercial performance and contributions from acquisitions.

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